The housing market: Another false bottom?
May 01, 2012
New housing data shows some signs that the real estate market has finally bottomed out. With current mortgage rates already near all-time lows and the government tapped out, this would be welcome news. But the question is: Will this prove to be the true turning point for housing -- or another false bottom leading to further depths?
Stabilization or pause?
The meaning of economic statistics is often in the eye of the beholder, and it's no different with the latest housing statistics.
An optimist would point to the following: Government figures released last week indicate the number of new homes sold in March was up 7.5 percent over the number sold in the same month a year earlier, and the median price was up 6.3 percent for the same period. Also, during the past year, the number of months' worth of new housing supply on the market shortened by 24.3 percent, while the median length of time it took to sell a new home shortened by 10.3 percent.
But a pessimist would respond that while the above suggests improvement over the past year, each of the above statistics actually worsened in the past month. So the question remains: Has the market really stabilized, or is it just starting on a new leg downward?
Sales, prices and starts
When watching the housing market, you are likely to hear about housing sales, prices and construction starts. The three are related, but ultimately sales is the category to watch most closely, as it helps drive the other two.
For example, if there is an excess supply of housing on the market, prices may take awhile to come around, even though sales are starting to pick up. The glut of foreclosed properties on the market may especially be distorting prices in housing right now. Therefore, sales is a more immediate indicator of whether demand is strengthening.
Also, housing starts may be a function of over-optimism rather than a reflection of actual demand, as was the case with the over-building at the peak of the housing boom. Again, sales bear watching more closely, because strong sales will eventually push up housing starts, but higher housing starts do not necessarily result in stronger sales.
The importance of interest rates
Current mortgage rates remain around 4 percent for a 30-year loan, which is close to the all-time low. These low interest rates have been an important tool in supporting the housing market, both by encouraging new buyers to enter the market and by helping current homeowners refinance so they can afford to stay in their homes.
But if the housing market has really turned the corner, the next question will be whether it can survive an increase in mortgage rates. From a historical perspective, today's mortgage rates are quite an abberration, and the true test of strength for housing demand will be whether it can be sustained once mortgage rates return to more normal levels.